In his Are You Selecting Your Customersâ&#128;¦Or Are They Selecting You?Â presentation at CSIA 2010, Dean Streck, CEO of V I Engineering, encourages the use of Activity-Based Costing (ABC) to identify, describe, assign costs to, and report on operational performance. A more accurate cost management system than traditional cost accounting; ABC identifies opportunities to improve business process effectiveness and efficiency by determining the “true” cost of a product or service. ABC principles are used:

To focus management attention on the total cost to produce a product or service, and

As the basis for full and accurate cost recovery.

Support services are particularly suitable for activity-based resourcing because they produce identifiable and measurable units of output.

4 Steps to Knowing Your ABCs

Identify activitiesâ&#128;&#148;perform an in-depth analysis of the operating processes of each responsibility segment. Each process may consist of one or more activities required by outputs.

Assign resource costs to activitiesâ&#128;&#148;this is sometimes called “tracing.” Traceability refers to tracing costs to cost objects to determine why costs were incurred.

Identify outputsâ&#128;&#148;identify all of the outputs for which an activity segment performs activities and consumes resources. Outputs can be products, services, or customers.

Assign activity costs to outputsâ&#128;&#148;assign activity costs to outputs using activity drivers. Activity drivers assign activity costs to outputs based on individual outputsâ&#128;&#153; consumption or demand for activities. For example, a driver may be the number of times an activity is performed (transaction driver) or the length of time an activity is performed (duration driver).

As also discussed in my project cost accounting post, this is a vital step in an integratorâ&#128;&#153;s ability to maximize the profitability. It becomes impossible to run the business from macro-level â&#128;&#147; simply tracking overall receivables and payables versus the total labor cost. You must be able to account for your finances on a project-by-project basis.

Customer Lifetime Value

By performing Activity-Based Accounting, you can ultimately assign a customer lifetime value(CLV) for your accounts. The CLV is the present value of the future cash flows attributed to the customer relationship. Use of customer lifetime value as a marketing metric tends to place greater emphasis on customer service and long-term customer satisfaction, rather than on maximizing short-term sales.

In his Are You Selecting Your Customersâ&#128;¦Or Are They Selecting You? Â presentation at CSIA 2010, Dean Streck, CEO of V I Engineering, Dean starts with recommendation to â&#128;&#152;Know Thyself.â&#128;&#153; Â You must first figure out who you are as a company today and the company that you want to be. Then, you can be proactive about selecting the customers that will help you achieve your goals. Â In part 2, he then describes methods to â&#128;&#152;Know Thy Customer.â&#128;&#157;

The 80/20 Rule

The role 80-20 rule, also known as the Pareto principle applies. Business management thinker Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed in 1906 that 80% of the land in Italy was owned by 20% of the population. It is a common rule of thumb in business: 80% of your sales come from 20% of your clients.

Whale of a Tale

Dean goes further to show that your top 20% of your business actually generates 180% of the profits. The middle 60% of your business is basically breakeven. And bottom 20% of your business loses the 80% of potential profits.

So What Then Must We Do

The revelation that 20% of your customers generate the bulk of your profit and the â&#128;&#152;otherâ&#128;&#153; 20 percent cost you most of that profit, then raises the question. What should I do about it? Should I just focus on the top 20%? Should I fire the rest? What about everyone in between. In the next couple of posts, we will look at techniques to deal with these issues.

Continuing with my series of my favorite CSIA presentations from 2010, I very much enjoyed the Are You Selecting Your Customersâ&#128;¦Or Are They Selecting You? by Dean Streck, CEO of V I Engineering who is an NI Select Alliance Partner.Â In his presentation, he astutely illustrates that customer selection defines everything about your company from how you quote and the prices you can charge, to your process model and how you work, to the people you hire and the skills they need, and ultimately to your profitability and your ability to control the destiny of your company. Dean offers a fresh perspective on your customers and offers advice on your selection process, so you can truly understand your customer contributions to your business.

Know Thyself

Dean starts with the premise that it is hard to pick your customers if you donâ&#128;&#153;t first clearly understand who you are. He recommends several tools that can guide you in this self-evaluation including some methods already mentioned in this blog.

Portersâ&#128;&#153;s Five Forces â&#128;&#147; a look at the most common factors that affect your business.: Your buyers Your suppliers, Your Rivals, Substitutes, and Barriers .

Where You Play â&#128;&#147; what is your competitive position and how are you choosing a unique point on the Productivity Frontier.

OAS Statement â&#128;&#147; What are you Objectives (ends), Advantages (means), and Scope (domain). The OAS statement is basically your business strategy. Check out these tips for your annual planning process.

Strategy Map – is a visual representation of the strategy of an organization. It illustrates how your organization plans to achieve its mission and vision by means of a linked chain of continuous improvements.

Balanced scorecard (BSC) – is a strategic performance management tool – a semi-standard structured report supported by proven design methods and automation tools that you can use to keep track of the execution of activities by your staff within their control and monitor the consequences arising from these actions.

Your Customer Selection Process â&#128;&#147; who in your organization is responsible for your customer selection. That starts with the CEO who develops and communicates the customer selection criteria. It then falls to marketing and sales to identify the accounts and create the opportunities that fit the criterion. Then, the rest of the operations on both the technical and business side must work to meet the needs of those clients.

Looking Into the Mirror

As you can see, customer selection is as much about you as it is the customer. You must first figure out who you are as a company today and the company that you want to be. Then, you can be proactive about selecting the customers that will help you achieve your goals.

In Jeff Millerâ&#128;&#153;s CSIA 2010 presentation, he proposed using the same lean manufacturing principles to their own processes as a system integration company. The last method that he described was the 5S Principle.

So, what are the 5S?

’5S’ is the name of a workplace organization methodology that uses a list of five Japanese words which are Seiri, Seiton, Seiso, Seiketsu and Shitsuke. Translated into English, start with the letter S. The list describes how items are stored and how the new order is maintained. The decision making process usually comes from a dialogue about standardization which builds a clear understanding among employees of how work should be done. It also instills ownership of the process in each employee.

Sorting: Eliminate all unnecessary tools, parts, instructions. Go through all tools, materials, etc., in the plant and work area. Keep only essential items. Everything else is stored or discarded.

Setting in Order: There should be a place for everything and everything should be in its place. The place for each item should be clearly labeled and arranged in a manner that promotes efficient work flow with each tool kept close to where it will be used.

Shine: Keep the workplace tidy and organized. At the end of each shift, clean the work area and be sure everything is restored to its place. Maintaining cleanliness should be part of the daily work – not an occasional activity initiated when things get too messy.

Standardizing: Work practices should be consistent and standardized. Everyone should know exactly what his or her responsibilities are for adhering to the first 3 S’s.

Sustaining: Maintain and review standards. Once the previous 4 S’s have been established, they become the new way to operate. Do not allow a gradual decline back to the old ways. While thinking about the new way, also be thinking about yet better ways..

Safety (Sometimes added): It is reasonable to assume that a properly planned and executed 5S program will inherently improve workplace safety, but some argue that explicitly including this sixth S ensures that workplace safety is given primary consideration.

Applying the 5S Principle

Obviously, your shop area may work best, but you can apply them to any shared work area. The big key is everything has a place and it is in its place (e.g. tool shadow boards to demark areas for things to set so you can always find them. Also include one point lessons at the work area to show how to do the job in simple terms. And, design the entire work areas for flow with the only needed tools in the area.

The end result is not only less wasted and cluttered space. But improve work flow and efficiency. Things always have a place and you immediately notice when they are missing. In addition, you can identify unnecessary items,Â red tag for removal, and get rid of it in a couple weeks if a need is not identified.

In Jeff Millerâ&#128;&#153;s CSIA 2010 presentation, he proposed using the same lean manufacturing principles to their own processes as a system integration company. The second method that he described was the Kaizen Method.

Kaizen â&#128;&#147; Japanese for Improvement

The Kaisen philosophy or practices focus upon continuous improvement of processes in manufacturing, engineering, supporting business processes, and management. When used in the business, kaizen refers to activities that continually improve all functions, and involves all employees from the CEO to the assembly line workers. Kaizen was first implemented in several Japanese businesses after the Second World War, influenced in part by American business and quality management teachers who visited the country. It has since spread throughout the world.

Applying Kaizen to Your Business

As Jeff Miller described their Kaizen efforts, I could see how it could (and perhaps should) be applied by many of our Alliance Partners. As opposed to the Value Mapping, Kaizen is optimal for quick, incremental improvements for the better. You could argue that all employees should just naturally do this, but (for some reason), it just doesnâ&#128;&#153;t happen.

So, it is worth going through a formal process. Start by picking an area of your business that you sense inefficiencies. Create a review team to map out the steps and brainstorm improvements. Involve in the day to day process as well as your Lean Core Team.

Start by creating a flow chart to make process visible. Establish a baseline and measures such as time( elapsed, lead), cost (# of steps, cycle time, paperwork), and quality (first pass yield, error rate, rework).

Then, identify waste (non-value adding steps) and decide how to eliminate them. See the white board example provided by Miller. I really liked the use of Post It Notes to make it easy to redesign the process. And, Iâ&#128;&#153;m sure it was gratifying to see the number of them that ended up in the â&#128;&#152;elimination circle.â&#128;&#153;

The sessions will typically 4 hours or less where you are looking for small improvements that you can implement quickly. By the end of the session, you have defined action items for process improvement. Once complete then look for the next thing to Kaizen.

In Jeff Millerâ&#128;&#153;s CSIA 2010 presentation, he proposed using the same lean manufacturing principles to their own processes as a system integration company. The first method that he described was Value Stream Mapping.

Adding Value

In Value Stream Mapping, you must first define what is â&#128;&#152;value addingâ&#128;&#153;. Value Adding Activity is an activity that transforms or shapes raw material or information to meet client requirements â&#128;¦. What is the client willing to pay for? And, Non-Value Adding Activities are those activities that take time, resources, or space but do not add value to the product itself. These wasteful activities can be summarized as:

Defects

Overproduction

Waiting

Non-utilized people

Transportation

Inventory

Motion

Extra processing

You can use a flow chart tool to help you visualize the process. It shows each step of the process as well as process times and wait times. Then, determine value add percentage. Keep in mind that you are looking for major improvements â&#128;¦ not just trimming minutes. Note that this is not a quick process â&#128;&#147; plan 1 to 3 days. Be sure to include people that do the work as well as those from outside. And, realize that implementation of corrective actions will take time (months / not weeks). So, make action plans, specific assignments, and follow up to verify completion.

Just to Illustrate the Point

Jeff Miller went on to describe how they had applied value mapping to identify inefficiencies in their accounting process. They found places where the amount of paperwork and check points wasting a lot of time and energy. Just to illustrate the point, they taped the steps on the floor to show how much effort it required to process an order. A bit embarrassing, but it went a long way to emphasizing to their employees that they were serious about improving their processes.

He gave several examples where they were able to cut the number of process steps in half. In some case, they were able to reduce process time by 80-90%.

One of the most interesting presentations at the CSIA 2010 conference was given by Jeff Miller of Interstates Control Systems, Inc. He proposed using the same lean manufacturing principles that they use with their clients to improve manufacturing process to their own processes as a system integration company. And his company is in the process of doing just that.

Eating Your Own Dog Food

Perhaps, a strange expression, but it apply describes how you should use what you are selling for your own good. For instance, should NI use our own products to build systems that test our own products? Similarly, Jeff described how ICS is methodically reviewing all aspects of their business from project management, to financial management, to sales and marketing, â&#128;¦. They analyze each area, identify inefficiencies, and make action plans to improve the processes.

There are numerous reasons for undertaking such an effort:

Quicker response times expected â&#128;&#147; notification to start time

Shorter project schedules

Cancelations and constant revisions

Economy is unpredictable at best

Price pressure from clients

Ensures you are poised for growth when economy turns

around

Engages employees to greater extent

Utilizes the creative talents of your people

Method to the Madness

Jeff went on to describe 3 methods for applying lean principles:

Value Stream Mapping

Kaizen

5S

In the coming weeks, Iâ&#128;&#153;ll do my best to relay what these methods are and how ICS applied them to improve their business operations.

I’m back in the office after attending the Control Systems Integrators AssociationÂ (CSIA) conference. I always enjoy attending the conference toÂ connectÂ Â people who are dedicated to the betterment of system integration by sharing best practices and promoting the recognition and importance of excellence.

Familiar Faces

Despite the fact that most of the constituents focus exclusively on industrial automation, the challenges of managing a system integration business are much the same.Â Several NI Alliance Partners there including:

VI Engineering

Viewpoint Systems

Bloomy Controls

Optimation

Data Science Automation

DMC

It was rewarding to see them there. In many cases, I likely introduced them to CSIA. But, it is a testament to their commitment to run a quality system integration business that they they invest the time and energy to participate in the conference.

Direct from the Horses Mouth

As always, I enjoy (and get the most out of) the presentations given by managers of an SI company. Speaking from their own experiences, they offer the best insight and practical advice on how to be successful as well as how to avoid failure. So, the best 3 sessions in my opinion were:

Applying Lean Manufacturing Principles to the System Integratorâ&#128;&#153;s World Jeff Miller, Director of Automation Services, Interstates Control Systems, Inc., Sioux Center, IA During tough economic times clients expect to see price cuts. So how does a systems integrator survive and remain poised for tremendous growth? One way is to apply lean manufacturing principals to our everyday work.

Are You Selecting Your Customers or Are They Selecting You? Dean Streck, CEO, VI Engineering, Farmington Hills, MI Not all customers are equal. This talk examines the importance of selecting your customers wisely and the far reaching impacts on your future. Dean will review various customer selection techniques and measurement methods including project margin, account margin, total lifetime value and the impact on your culture. Actual examples include the impacts of both wise and poor choices in changing industries.

The Top Ten Concrete Business Tips Learned Over 25 Years as a Systems Integrator Rick Pierro, President, Superior Controls, Seabrook, NH Rick will share valuable, easy to implement, and proven ideas which will produce more profit and add more value to your business. From marketing, hiring, contracts, structure and additional services, this talk will leave you with practical ideas to improve both your customer satisfaction and your bottom line.

Over the next few weeks, I’ll try to pass along some of the ideas from these presentations. But, if you really want to get the most value consider joining CSIA and attending the conference for yourself.

As you probably know by now, NI recommends the Control Systems Integrator Association as a great way toÂ learn about the system integration business from colleagues who also manage the same type of business.

Setting the bar

You may also be aware that CSIA has developed a set of guidelines and and audit process that certify your business practices (a bit like ISO but specific for system integrators). Potential members have often asked what the criteria in the audit for CSIA Certification are, but the criteria were not made public . . . until now.

Â For Your Benefit

Why would you want to know the criteria? Perhaps, you are curious to know whatÂ integrators had to do in their business to pass the audit for certification before joining the association. For instance, was the audit about technical ability, business practices, or both.?

I encourage you to review them. If nothing else, it is a quick check list of the areas that CSIA believes are critical to your success as a system integrator. Further yet, consider joining CSIA to get more details about these and other practices, have access to other material, attend their meeting and annual conferences, …..

I’m looking forward to attending theCSIA Conference, AprilÂ 30 - May 2. It is always a great opportunity to learn more about best practices. I’m particularly looking forward to the â&#128;&#156;Survival and Growth in These Trying Times” presentation by Don Roberts fromExotek. If you are not familiar withCSIA (Control Systems Integratorâ&#128;&#153;s Association), they are committed to the business development of system integration companies. And Exotek is a management-consulting firm focusing specifically on system integration companies.

A Little Reminiscing

I first heard of CSIA in the mid-1990s whenNational Instrumentswas making our first foray into the Industrial Automation industry with our BridgeVIEW (nowLabVIEW DSC), Lookout, and ourDistributed I/O products. I attend my first CSIA conference in 1996 with the sole purpose of finding potential NI integrators, but discovered a group of system integration managers that were willing to share their ideas about managing system integration companies successfully. Over the years, Iâ&#128;&#153;ve been an active participant and promoter of CSIA Iâ&#128;&#153;ve supported the development ofCSIA Best Practices and Benchmarkswhich provides performance standards in critical business areas. NI was the first company to endorse the CSIA audit, when we included it as part of our Select Partner qualification process.

Alliance Partners Contributions to CSIA

Iâ&#128;&#153;m proud to say that our NI Alliance Partners have made significant contributions to CSIA over the years. To date, over 30 NI Alliance Partners have joined CSIA. Over 20 have passed the audit, constituting nearly 1/4th of the 100 Certified CSIA members. And, Iâ&#128;&#153;d like to especially recognize Dean Streck fromV I Engineeringand Jim Campbell fromViewpoint Systems, who have just completed their tenure on the CSIA Executive Council. They have made substantial contributions to the organization including: Dean - leading the Best Practices committee and Jim - for his service at Treasurer and on the Insurance committee. Thanks for your efforts and being good representatives of NI and our Alliance Partners.

Question: Are you going to the CSIA conference? Or if you do, let us know what you thought of it.

AtNational Instruments, we create innovative computer-based products that empower engineers and scientists to improve our world and every day life. Now, to have a broad impact on engineering and scientific endeavors around the world, we recognize that we canâ&#128;&#153;t do it all. So, we focus on building a powerful, flexible platform with tightly integrated software and hardware components. And, we rely on our partners to make our customers successful.

The NI Alliance Partner Program

So, we established theÂ NIÂ Alliance Partner Program, a worldwide network of more than 600 consultants, system integrators, developers, channel partners, and industry experts who join NI in providing customers with complete, high-quality solutions.

Partners are critical to our success.

Â

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The Need for Stronger Partners

As the National Instruments product line grows capable of solving more demanding applications, we recognize the need to develop relationships with system integrators and value-added resellers that are more than just experts in our products. We need to partner with companies that have the resources and skills to handle larger projects and deliver solution-level products.

Fostering Better Business Practices

During the past fifteen years, I’ve worked with hundreds of companies from small consultants to large system integration organizations. WhatÂ I discovered is that service companies encounter common challenges as they grow their business. Iâ&#128;&#153;ve been able to observe good business practices to overcome these challenges.

In addition, NI is a member of theCSIA (Control Systems Integratorâ&#128;&#153;s Association)who are committed to the business development of control system integration companies.Â I have been active an participant in the creation of the CSIA Best Practices and Benchmarks which provides performance standards in critical business areas that are critical to successful system integration.Â I also work closely with Exotek, a management-consulting firm who are experts in best business practices for system integraton companies.